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Carbon Trading System

1. Madrid Climate talks ended without any agreement on rules for future carbon trading.

2.  Madrid talks were expected to finalize rules for a new global carbon market as part of the Paris Agreement.

When was Carbon trading system introduced?

1. Carbon Trading System, also known as ‘Emission Trading System’(ETS), is an exchange platform of credits between nations designed to reduce emissions of carbon dioxide.

2. Emissions trading allows countries to sell excess emission units (emissions permitted them but not ‘used’) to countries that are over their targets.

3. Certified Emission Reductions (CERs) are a type of emissions unit or carbon credits issued by the Clean Development Mechanism (CDM) board for emission reductions achieved by CDM projects.

4. This trading system originated in the 1997 Kyoto Protocol to reduce carbon emissions and mitigate climate change and future global warming.

5. ‘Cap and Trade system’ is used worldwide for carbon trading.

What is the Cap and trade system?

1. Cap and trade is an approach that harnesses market forces to reduce emissions cost-effectively.

2. It differs from ‘command-and-control’ approaches where the government sets performance standards or dictates technology choices for individual facilities.

3. Cap and trade allows the market to determine a price on carbon and that price drives investment decisions and spurs market innovation.

Key Design Elements

1. Complementary Policies- Decide on other policies that should be implemented with cap and trade system.

2. Scope –Decide on covering emission sources and greenhouse gases.

3. Target –Decide the required level of emissions reduction and dead-line.

4. Allowance Allocation –Procedure to distribute allowances.

5. Banking/Borrowing –Decide between trading and saving of the excess allowances.

6. Offsets –Decide on usage compliance of verified emissions reductions generated by companies outside the cap.

7. Market Integrity – To avoid market manipulation

Why is cap and trade system preferred?

1. A cap may be the preferable policy if a jurisdiction has specific emissions targets. They set an emissions cap and issues a quantity of emission allowances consistent with that cap.

2. Emitters must hold allowances for every ton of greenhouse gas they emit. Companies may buy and sell allowances and the market establishes an emissions price.

3. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies facing higher costs to buy.

4. It also differs from a tax as it provides a high level of certainty about future emissions, and not the price of those emissions.

How many credits India earned?

1. To lower carbon footprint, India has done

a) Investment in low carbon-intensive technologies

b) Protection and conservation of forests

c) Successfully switched to renewable energy generation

2. In this process, India has earned lot of carbon credits or ‘Certificate of Emission Reductions (CER)’.

3. Indian companies have registered 1,669 projects under the system and earned 246.6 million credits.

4. Another 526 projects were registered under the ‘voluntary’ market and these have earned 89 million credits. In total, Indian companies got roughly 350 million credits.

Which are the benefits and drawbacks?


1. Targets Emissions Reductions

a) ETS has resulted in emission reductions of carbon dioxide and other greenhouse gases (GHGs).

b) European Union Emission Target System (EU STS) reduced emissions by 3% in phase I. Companies in EU reduced emissions by 25-28% in phase II.

c) For regional states, emissions would have been 24% higher in the absence of ETS.

2. Enables clear emissions reduction paths

a) ETS ensures emissions remain at or below specified emissions cap across covered sectors.

b) Jurisdictions aim to adopt progressively declining credit caps in line with national targets.

3. Makes Economic sense

a) ETS delivers cost-effective abatement.

b) Compared to other alternatives, ETS incurred lowest costs per ton of abated emissions.

4. Provides flexibility to the countries

a) Jurisdictions can choose where and when to reduce emissions, choose cheapest options.

b) Price signal created through ETS automatically adopts changing economic conditions.

5. Encourages low-carbon development

a) ETS facilitates transition to low-carbon economy, break away from carbon-intensive technologies.

6. Promotes innovation of low-carbon tech

a) ETS promotes deployment and innovation of low-carbon technology

b) Low-carbon production process, products are favoured by incentivizing innovation.

7. Country specific adoption

a) ETS can be adopted specifically by each country or region. There are currently 20 systems in operation.

b) Policy can be designed to accommodate domestic priorities and fulfil different roles in policy.


1. Carbon trading is considered as a false solution to climate change problem as carbon trading is claimed to be creating more carbon emissions.

2. The trading system is being exploited by rich nations as it is considered as license for rich nations to pollute more.

3. Carbon permits prices are not financially attractive. It affects poorer nations.

4. There is inconsistency in the distribution of carbon credits of companies.

Where lies the solution?

1. Specific limits on carbon emissions need to be set that shouldn’t be exceeded by countries at any cost.

2.  Carbon tax should be introduced, and companies be made to pay for CO2 they produce.

3. Regulations and penalties to be made more stringent and time bound.